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Summary:

Asset quality concerns loom large: Downgrade to SELL Indian Bank (INBK) Q4FY12 results was well below our expectations. Asset quality has deteriorated sharply for the bank. Gross NPAs in absolute terms have gone up Rs. 6.6bn qoq an increase 55% compared to previous quarter. Slippage ratio has moved up sharply to 4.8% as nearly Rs. 10.4bn worth of loans slipped into NPA status in the quarter gone by. An additional Rs. 25.0bn worth of loans got restructured in the quarter taking the total stock of restructured assets to Rs. 89bn which is ~9.8% of the loan book. Provisioning costs have gone up sharply by 140% qoq. However the bank has made ad-hoc provisions of Rs 1.9bn which gives us some comfort. Management has indicated that an additional Rs 11bn worth of loans can get further restructured in the next quarter. Margins have come off sharply on account of reversal of interest to the tune Rs 1.5bn. Loan growth during the quarter was tepid at 2.6% on qoq basis. The current quarter results bring to the fore concerns on asset quality and we believe the disconcerting sharp jump in slippages compounded with large restructuring warrants a change in outlook on the stock. Additionally slippages for the quarter were spread across the spectrum – from textiles to glass- raising serious questions on underwriting standards. Management’s commentary indicating that some of the slippages in the current quarter were technical slippages which should get upgraded in a couple of quarters only succeeded in raising apprehensions on recognition norms. On account of the aforesaid reasons we downgrade the stock to SELL with a target price of Rs 151 valuing the stock at 0.8X our stress case FY13ABV. Highlights of the quarter’s performance Loan growth, CASA ratio: Loan book grew by 2.6% qoq & 20% yoy. Deposits grew by 14% on yoy basis and by 1.4% on qoq basis. CASA ratio improved marginally to 31% NII & Margins trends : NII at Rs. 10.8bn, is down 2.6% yoy and 7.5% qoq; NIM as per our model has decreased sequentially to 3.3%; Asset Quality : GNPA ratio stands at 2.0% and NNPA ratio stands at 1.33%. PCR stands at 70%.

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